Question

1) Consider two different hedge funds with the following data related to performance:

Hedge fund              Alpha           Beta

Fund A                       5%            1.6

Fund B                                   3%            0.8

Assuming that beta is consistent with the type of investing we expected in both cases, which fund performed better.

A. Fund A, because it had the higher return

B. Fund A, because it had the higher alpha

C. Fund B, because its alpha is more impressive than Fund A when we consider how much less risk the fund took.

D. Fund B, because the beta is closer to 1.

2) When we analyze the performance of an actively managed mutual fund we find that the fund generated a beta of 1 and an alpha of zero.

A. this result shows that the manager took no risk when investing

B. this result shows that the manager did not add any value to performance with his/her decision-making

C. both (A) and (B) are true

D. none of the above

3) Consider two different hedge funds with the following data related to performance:

Hedge fund              Alpha           Beta

Fund A                       1%            0.8

Fund B                                   3%            -0.3

Assuming that beta is consistent with the type of investing we expected in both cases, which fund performed better?

A. Fund A, because Fund B should have negative alpha to match its negative beta

B. Fund A, because it had a higher beta than Fund B

C. Fund B, because its alpha is higher than Fund A.

D. Fund A, because the beta is closer to 1.

4) A positive alpha for a mutual fund means:

A. the fund invested in high-risk strategies

B. the fund manager’s performance was bad

C. both (A) and (B)

D. none of the above

5) In the Wall Street Journal’s darts versus pros competition, the difference in returns generated by the two portfolios is explained by:

I. the darts were poorly thrown

II. the pros pick riskier stocks

III. other investors buying the stocks that the pros pick

IV. the pros are simply good at picking stocks

A. I and II

B. II only

C. IV only

D. II and III

6) __________ is a false statement regarding open-end mutual funds.

A. They offer investors a guaranteed rate of return

B. They offer investors a well diversified portfolio

C. They redeem shares at their net asset value

D. None of the above (A, B, and C are all true)

7) When we analyze the performance of an actively managed mutual fund we find that the fund generated a beta of 1.5 and an alpha of zero.

A. this result shows that the manager took relatively high risk when investing

B.this result shows that the manager did not add any value to performance with his/her decision-making

C. both (A) and (B) are true

D. none of the above

8) An attractive feature of Exchange Traded Funds (ETFs) is:

A. the price of the fund always matches the Net Asset Value

B. the investor has more control over tax implications of trading than with a mutual fund

C. ETFs only trade once a day, making it easier to keep track of their prices.

D. the fund is highly likely to produce a positive alpha

Answer 1

1. Option B is the answer. It doesn't matter how high the return is when it is commensurate to the risk taken. The risk taken in both the investment was in accordance to the investment so higher alpha means which fund exceeded the benchmark better in face of evident risk thus higher alpha means.

2. Option C is the answer. Alpha 0 means that fund has not outperformed the index at all meaning the manager has not added any value with his strategies. Beta 1 means the fund will move in lock step fashion with market in case of volatility that's why both A and B are correct.

3. Option C is the correct answer: It doesn't matter if Beta was negative or positive deciding factor is the alpha coefficient. Fund performed better than the other if its alpha coefficient is higher than the other.

4. Option D is correct. Alpha denotes the performance of manager if he has added anything to fund with his strategies. Positive alpha means fund has outperformed the benchmark. It doesn't necessarily means invested in risky strategies that is denoted by beta.